A trade deal won't save the world's largest economies from slowing down this year

Gina HeebMar 14, 2019, 22:54 IST

Feng Li/Getty Images

There has been growing hope that the US and China could reach a trade deal soon.

But experts say that wouldn't be enough to stave off a deceleration in growth in the largest economies.

The effects of tariffs are expected to outlast the trade war.

Even if the US and China reach an agreement to end a trade war that has cast uncertainty on financial markets and consumers over the past year, the largest economies are still set to slow in coming months.

President Donald Trump reversed on plans to escalate tensions in the beginning of March, sparking hope that Washington and Beijing might be able to reach a deal that would lower the tariffs levied last year on hundreds of billions of dollars' worth of goods

"We don't expect the deal to have a major impact on the economy," said Andrew Hunter, a senior economist at Capital Economics.

Government data released Thursday showed industrial output in China sank to its lowest point in 17 years, the latest in a wave of dismal economic results out there over the last year. Even as Chinese officials roll out stimulus measures left and right, some still see the possibility of a hard landing ahead.

In the US, a growing number of key indicators have similarly pointed to slowing activity as the effects of tax cuts and other stimulus measures fade.

Economic growth forecasts for the beginning of the year have been steadily falling, especially following surprisingly soft retail sales and employment reports out this month. Nearly half of economists surveyed by The Wall Street Journal this month think the US will enter a recession by 2020.

Hunter sees reported commitments made in negotiations, including reducing the US-China trade deficit, as unlikely to add up to much in the short term.

There may be some scope to increase exports of goods like aircraft and motor vehicles, he said, but agricultural or energy commodities are clearly subject to greater supply constraints. Global trade relationships have also shifted since last year, so any major production changes would take time.

It's unclear if or when duties will be removed. With little evidence of progress on structural issues, Trump told reporters this week that he was in "no rush" to make a deal with China. On Thursday, Bloomberg reported that a summit between Trump and Chinese President Xi Jinping appears likely to take place in April.

The worst may be yet to come in the trade war, according to Li Zeng, an economist at UBS. Chinese exports mostly held up through the end of 2018, but that could change as frontloading wanes and as businesses relocate production to other countries.

"This year, however, while the positive progress in the trade talks has given the market sentiment a big boost, we expect the real damage from the trade war to continue to manifest itself," Zeng said.